London Stock Exchange Group has agreed to sell its French clearing business to Euronext for 510 million euros ($534 million), as it seeks to win regulatory approval for its proposed merger with Deutsche Boerse.
The European Commission has expressed antitrust concerns about the $28 billion merger and the impact on the clearing of derivatives contracts in particular. The Commission, in a document on the issue, has not made clear if the sale of the French clearing business, LCH Clearnet SA, would be enough to dispel its concerns, two sources told Reuters.
One person directly involved in the merger process said he did not believe the sale alone would address the Commission’s concerns.
"I have doubts that this is enough," he said. He suggested that LSE might also opt to sell Borsa Italiana, operator of the Milan stock exchange, to help address antitrust concerns, although a second source familiar with the process said that a sale of Borsa Italiana was not being discussed at the moment.
An LSE spokeswoman said the company could not comment beyond its statement on the sale on Tuesday. Deutsche Boerse representatives declined to comment.
LSE Group and LCH Group Limited said in a joint statement that they had agreed on the terms of Euronext's all-cash offer, after announcing last month that they were in exclusive talks with Euronext on a sale.
LSE and Deutsche Boerse plan to formally submit the Clearnet SA sale as a remedy to the European Commission's concerns in the next few days sources told Reuters.
A major hurdle to LSE's merger with Deutsche Boerse is how antitrust regulators define the derivatives market.
Deutsche Boerse is hoping that the European Commission will treat over-the-counter (OTC) derivatives contracts and on-exchange traded derivatives as two separate markets, sticking to a market definition the Commission confirmed back in 2012.
Deutsche Boerse's Eurex is mainly active in exchange-traded derivatives, while the LSE's LCH.Clearnet is active in the OTC business.
But Deutsche Boerse has acknowledged that the European Commission may change its mind, prompting the merger partners to make concessions such as selling LCH Clearnet SA to avoid the LSE-Deutsche Boerse combination being regarded as a dominant player.
"It seems the market definition is changing," Deutsche Boerse Chief Financial Officer Gregor Pottmeyer said about the European Commission's antittrust deliberations in November.
For pan-European exchange operator Euronext, buying Clearnet will give it control of a platform for which it provides much of the revenue and will make it less reliant on a competitor's clearing services.
Clearing is becoming a much more lucrative business as global reforms introduced after the 2007-09 financial crisis mean banks must clear the bulk of their derivatives trades to make them safer and more transparent.
"If the DB-LSE-merger is completed, then Euronext will be strengthened at the core of the euro zone capital market with this transaction," Euronext CEO Stephane Boujnah told CNBC, adding that Euronext is also considering other takeovers. "The reason why we are confident we can capture those opportunities is because we have significant firing power in our balance sheet, in particular because of our extremely low level of debt.", Boujnah said.
Euronext said it expected the deal to add to its earnings in double digits from the first full year, before costs pegged at 40 million euros. It forecast cost savings of 13 million euros before taxes.
Euronext shares were up 2.6 percent at 1006 GMT at 40 euros on Tuesday, while LSE Group and Deutsche Boerse shares were virtually flat at 2,901 pence and 79.41 euros respectively.
The Commission is due to decide on the merger on March 13, after extending its review deadline for the second time.
It stated its objections to the merger in December, but outlined fewer concerns than in its first letter sent to both exchange operators in September.
($1 = 0.9552 euros)
(Additional reporting by Vidya L Nathan in Bengaluru, editing by Susan Fenton)